33  o.j 

F392k 


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in  2018  with  funding  from 

University  of  Illinois  Urbana-Champaign  Alternates 


https://archive.org/details/rightwaytofigureOOfern 


HetuJ  -  iV/ec. 


The  National  Hardware 
Association  of  the 
United  States 

505  Arch  Street 
PHILADELPHIA 


The  following  table  shows  the 
percentage  of  cost  which  must  be 
added  to  effect  a  given  percentage 
of  profit  on  the  sale : 


Add  % 
to  Cost 

To  Make  $ 
Profit  on  Sales 

Add  % 
to  Cost 

To  Make  % 
Profit  on  Sales 

1 

.99 

26 

20.63 

2 

1.96 

27 

21.26 

3 

2.91 

28 

21.88 

4 

3.85 

29 

22.48 

5 

4.76 

30 

23.08 

6 

5.66 

31 

23.66 

7 

6.54 

32 

24.24 

8 

7.41 

33 

24.81 

9 

8.27 

33  K 

25.00 

10 

9.09 

34 

25.37 

11 

9.91 

35 

25.93 

12 

10.71 

36 

26.47 

12  % 

11.11 

37 

27.01 

13 

11.50 

37% 

27.27 

14 

12.28 

38 

27.54 

15 

13.04 

39 

28.06 

16 

13.79 

40 

28.57 

16% 

14.29 

41 

29.08 

17 

14.53 

42 

29.58 

18 

15.25 

43 

30.07 

19 

15.97 

44 

30.56 

20 

16.67 

45 

31.03 

21 

17.36 

46 

31.51 

22 

18.03 

47 

31.97 

23 

18.70 

48 

32.43 

24 

19.35 

49 

32.88 

25 

20.00 

50 

33  % 

The  percentage  of  profit  should 
always  be  figured  on  the  selling 
price  and  not  on  the  cost. 


This  booklet 

was  originally  pre¬ 
pared  for  private  distri¬ 
bution,  but  has  been 
reprinted  at  the  request 
of  a  number  of  business 
houses  who  desired  to 
supply  their  customers, 
salesmen  and  house  em¬ 
ployees  with  a  copy. 


A  careful  reading  is 
recommended  in  the  be¬ 
lief  that  increased  prof¬ 
its  will  accrue  to  those 
who  adopt  in  practice  the 
principle  expounded. 


tj  Members  can  obtain 
additional  copies  from 
the  Association's  Office. 


Domestic  Engineering’s  Cartoon  “Pens  Asinorum 


2««3 
®  8*°S 

c.  a 
COO  £ 
l UK  ^ 


21 


(-Or 


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to  52 


The  Right  Way  to 
Figure  Profits 

By 

Thomas  A.  Fernley 


Published  by 

The  Commerce  Publishing  Company 
Philadelphia 


Copyright  1909-1911 
Thomaa  A.  Fernley 
Philadelphia 


THE  RIGHT  WAY 
TO  FIGURE  PROFITS 


IT  is  indeed  remarkable  that 
on  such  an  important  sub- 
_  ject  as  the  method  of  cal¬ 
culating  the  percentage  of  prof¬ 
its  there  should  be  such  a  vari¬ 
ance  of  opinion  as  seems  to  ex¬ 
ist,  for  the  issue  involved  is  vital 
to  the  welfare  of  every  one  en¬ 
gaged  in  any  form  of  commer¬ 
cial  activity. 

True,  the  vital  issue  is  the 
showing  of  net  profit  in  dollars 

and  cents  at  the 
Correct  Method  encj  0f  the  year 
Should  be  ,  , , 

Sought  when  the  inven' 

tory  is  completed 

and  books  are  closed,  but  in  or¬ 
der  that  this  showing  should  be 
satisfactory,  the  proper  method 

of  figuring  profits  should  be  pur- 
.  sued  during  the  year.  In  our 
mind  there  should  be  no  misun¬ 
derstanding  as  to  the  correct 
method  of  calculating  this  most 
essential  element  in  every  busi¬ 
ness  transaction,  for  accuracy  is 
the  twin  brother  of  honesty  and 

(5) 


The  Right  Way  to  Figure  Profits 


right  methods  are  necessary  for 
the  attainment  of  any  desirable 
thing. 

Every  man  engaged  in  busi¬ 
ness  ought  to  be  able  to  see  that 


John  does  not 
have  50%  more 
than  James,  be- 


They  Ought  to 
But  Do  They  ? 


cause  James  has  50%  less  than 
John. 

Yet  many  business  men  seem 
to  have  persistently  refused  to 
acknowledge  that  any  per  cent, 
of  a  smaller  sum  is  a  smaller  per 
cent,  of  a  larger  sum — that  if  a 
fixed  sum  is  a  certain  per  cent, 
of  a  certain  sum,  it  is  a  smaller 
per  cent,  of  a  larger  sum — or  to 
put  it  concretely,  that  if  25  is 
25%  of  100  it  is  only  20%  of 
125  and  25%  increase  over  cost 
is  20%  profit  on  the  selling 
price. 

An  incorrect  or  incomplete 
understanding  of  percentage  of 
profits  and  failure  to  observe  the 
proper  method  of  figuring  the 
percentage  of  profit  is  the  rock 
on  which  many  commercial  un¬ 
dertakings  have  gone  to  pieces. 


(6) 


The  Right  Way  to  Figure  Profits 


Text  Books 
Incomplete 


The  subject  of  percentage  of 
profit  has  not  been  given  suffi¬ 
cient  consideration 
by  the  school  and 
college  text  book 
writers,  especially  from  the 
standpoint  of  business  men,  so 
that  the  insufficient  and  incor¬ 
rect  understanding  of  the  ques¬ 
tion  has  led  many  to  falsely  be¬ 
lieve  that  the  percentage  of 
profit  should  be  figured  on  the 
cost. 

The  method  of  figuring  the 
ratio  of  profit  on  the  sale  is  de¬ 
clared  by  many  who  may  not  be 
fully  informed  to  be  diametric¬ 
ally  contrary  to  the  methods 
taught  in1  our  schools,  and  is 
therefore  loudly  decried  by  those 
who  now  insist  on  using  the  net 
cost  as  a  base,  to  their  conse¬ 
quent  loss. 

So  that  it  may  not  be  misun¬ 
derstood,  it  should  be  said  that 
it  is  scientifically  correct  to  use 
either  the  cost  or  the  selling 
price  as  a  base  in  figuring  the 
percentage  of  profit,  so  long  as 

(7) 


The  Right  Way  to  Figure  Profits 


it  is  stated  on  what  base  the  per¬ 
centage  has  been  calculated. 
This,  however,  should  not  be  re¬ 
garded  as  being  in  the  nature 


of  an  academic 
discussion,  for  it 
is  certainly  the 
privilege  of  pro- 


Strictly 
a  Business 
Question 


fessional  men  to  hold  any  views 
that  they  may  prefer  on  this 
subject;  but  it  is  hoped  that  they 
will  concede  to  business  men  the 
same  privilege,  especially  when 
the  method  followed  has  such  a 
decided  effect  on  the  volume  of 
Net  Profit  realized  from  the  con¬ 
duct  of  their  business,  and  per¬ 
mit  them  to  adopt  that  method 
which  most  fully  answers  their 
requirements.  The  idea  is  to 
prevent  men  from  figuring  the 
cost  of  doing  business  on  the 
gross  sales  and  their  percentage 
of  profit  on  the  cost  of  mer¬ 
chandise — without  appreciating 
the  fact  that  it  makes  a  differ¬ 
ence. 

School  and  college  text  books 
refer  to  this  question  as  “Per¬ 
centage  of  Gain  and  Loss,”  and 


The  Right  Way  to  Figure  Profits 


the  initial  figure  or  cost  is  used 
as  the  base. 

Some  text  books  use  as  the 
base  a  prime  or  net  cost  and 
again  others  add  a  certain 
amount  for  expenses  using  the 
gross  cost  as  the  base.  So  far  as 
the  question  under  discussion  is 
concerned  the  percentage  of 
profit  should  be  figured  on  the 
selling  price,  just  the  same, 
whether  prime  cost  or  cost  plus 
selling  expense  is  used. 

Many  of  the  examples  given 
refer  to  abstract  figures,  citing 
such  cases  as  the  following: 

“If  the  population  of  a 
town  increases  from  30,000 
to  45,000,  what  is  the  per¬ 
centage  of  gain?  Answer 
— 50%.” 

This  is,  of  course,  correct,  and 

Percentage  of  the  words  “gain” 
Increase  in  and  “increase” 
Abstract  Figures  are  properly  used 
Not  the  Question  this  connec¬ 
tion,  but  this  bears  no  relation  to 
the  question  of  percentage  of 
profit  as  applied  to  commercial 
transactions  involving  money. 

(9) 


The  Right  Way  to  Figure  Profits 


With  the  cost  as  a  base  or  100 
the  text  books  figure  that  if  25% 
is  added  the  percentage  of  profit 
is  twenty-five  one  hundredths 
(25/ioo)  or  !/4,  which  is  equal  to 
25%.  In  this  case  we  would 
consider  the  cost  as  100  and  the 
added  25%  would  make  a  total 
of  125. 

The  selling  price  should  be 


considered  as  100 
per  cent.  (100%) 
and  percentage  of 


Selling  Price 
Equals  100^ 


profit  would  be  25/,25  or  */5 
which  would  be  20%  profit  on 
the  sale. 

A  percentage  of  gain  or  in¬ 
crease  of  many  hundred  per 


cent,  is  possible, 
but  as  percentage 
of  profit  is  on 
sale,  100  per 


Hundred 

Per  Cent.  Profit 

Impossible 


cent,  profit  is  impossible  unless 
the  goods  are  secured  free  of 
charge. 

The  percentage  of  profit  and 
the  percentage  of  cost  of  doing 
business  should  both  be  figured 
on  the  same  base. 

First,  let  us  consider  what  we 


(10) 


The  Right  Way  to  Figure  Profits 


use  as  our  cost.  Almost  all  mer¬ 
chants  consider  as  cost  the  in¬ 
voice  price  or  “prime”  cost,  with 

Most  Merchants  no  s  e  1 1  i  n  g  or 
Base  Figures  on  other  expenses 
Delivered  Cost  added,  merely 

figuring  in  the  cost  of  delivery 
to  their  warehouse. 

All  operating  expenses,  stor¬ 
age,  selling,  office  expenses  and 
every  other  item  of  expense  and 
profit  must  be  provided  for  in 
the  difference  between  this  net 
cost  and  the  net  selling  price. 

On  the  other  hand,  manufac¬ 
turers  very  generally  start  with 

their  shop  or  mill 
cost  and  add  to 
this  all  the  direct 
outlays  incident 
to  placing  the  goods  in  the 
hands  of  the  buyer.  This  in¬ 
cludes  storage,  selling  expenses, 
office  expenses,  packing,  freight 
and  all  miscellaneous  expenses, 
making  a  gross  cost  above  which 
everything  is  profit. 

This  fact  accounts  in  a  meas¬ 
ure  for  the  variance  of  opinion 
between  some  manufacturers 

(11) 


Manufacturers’ 
Cost  Includes 
Selling  Expenses 


UNIVERSITY  OF  ILLINOIS 
LIBRARY 


The  Right  Way  to  Figure  Profits 


and  merchants  on  this  question. 
Manufacturers  are  prone  to  tell 
merchants  that  on  their  line  of 
goods  a  profit  of  25%  is  made, 
when  the  fact  is  that  the  gross 


profit  is  20%  on 
the  sale.  If  argu¬ 
ments  of  this  na- 


Don’t  be 
Misled 


ture  are  properly  met,  a  change 
of  method  beneficial  to  the  en¬ 
tire  business  community  will  be 
effected. 

The  fact  is,  however,  that  no 
matter  whether  the  prime  or 
gross  cost  is  used  the  percentage 
of  profit  should  be  calculated  on 
the  selling  price. 

Business  men  generally  are 
coming  to  a  knowledge  of  the 


fact  that  univer¬ 
sal  convention  in 
an  approved 
method  of  figur¬ 
ing  the  percent- 


Universal 
Adoption  of 
Correct  Method 
Desirable 


age  of  profit  adapted  to  business 
conditions,  will  accrue  to  the 
general  benefit  of  all. 

Some  of  the  more  important 
reasons  for  pursuing  this 
method  of  figuring  the  Percent- 


da) 


The  Right  Way  to  Figure  Profits 


on  Two  Items 
of  Capital 


age  of  Profit  on  the  sale  are  ag 
follows : 

In  every  business  (we  refer 
more  particularly  to  merchan¬ 
dizing)  two  separate  amounts 

of  capital  are  re- 
Returns  Needed  qUjred.  One  item 

of  capital  is  re¬ 
quired  for  invest¬ 
ment  in  merchandise.  Another 
item  of  capital  is  necessary  for 
operating  expenses,  selling  ex¬ 
penses  and  all  other  expendi¬ 
tures  not  properly  chargeable  to 
merchandise  account. 

All  the  capital  invested  in  the 
business  must  produce  a  proper 
return.  Dividends  are  obvious¬ 
ly  impossible  on  the  entire 
amount  of  capital  invested  un¬ 
loss  all  is  considered  in  making 
selling  prices. 

If  the  percentage  of  profit  is 
reckoned  on  the  cost  of  mer¬ 
chandise  only,  no  provision  is 
made  for  the  other  necessary 
item  of  capital  demanding  re¬ 
turns. 

The  sales  totals  are  always 
readily  ascertained,  but  the  total 
of  each  individual,  daily  and 

(13) 


The  Right  Way  to  Figure  Profits 


monthly  cost  of  goods  sold  is  sel* 
dom,  if  ever,  recorded  in  the 
books  of  business  houses. 

Therefore,  with  the  sales  to* 

tals  always  present  and  the  fact 

_  A  _  _  T  conceded  that  the 

Total  Cost  Not  „  .. 

Accessible  purpose  of  the 

business  is  pri¬ 
marily  selling,  is  not  the  sale  a 
proper  base  for  all  calculations, 
and  how  could  cost  be  considered 
when  it  is  not  definitely  known 
by  reference  to  sales  books? 

Gross  costs  can  only  be  ascer¬ 
tained  from  the  totals  obtained 
at  the  end  of  the  business  year, 
and  are  not  shown  daily  as  are 
the  gross  sales. 

The  amount  of  profits  de¬ 
pends  largely  on  the  volume  of 
business,  so  that  the  percentage 
of  profits  to  sales  is  clearly  indi¬ 
cative  of  the  character  of  the 
year’s  Work. 

The  percentage  of  profits  on 
cost  would  not  indicate  so  accu¬ 
rately  the  result  of  the  year’s 
business. 

The  percentage  of  expense  of 
(H) 


The  Right  Way  to  Figure  Profits 


conducting  a  business  may  be 
readily  ascertained  by  dividing 
the  gross  expenses  by  the  gross 
sales.  As  this  percentage  of  ex¬ 
pense  is  on  the  sales*  it  is 
thought  best  to  refer  to  the  per¬ 
centage  of  profit  on  the  sale  to 


avoid  any  misun- 
Percentage  of  derstanding  and 


Expense  is 
Found  on  Sales 


consequent  loss 
through  the  use 


of  any  other  method.  For  in¬ 
stance,  if  you  figure  your  per¬ 
centage  of  profit  on  the  cost  and 
your  overhead  expenses  on  the 
sale — you  may  add  25%  to  the 
cost — with  an  overhead  expense 
of  20%  on  the  selling  price  and 
expect  to  make  money.  Do  you  ? 

The  fact  that  a  profit  is  not 
made  until  a  sale  is  actually  ef¬ 


fected  further  ad¬ 
vances  the  selling 
price  as  the 


No  Profit  Till 
Goods  are  Sold 


proper  basing  factor  for  per¬ 
centage  of  profit. 

The  salary  or  other  form  of 
remuneration  of  salesmen  is  al¬ 
ways  reckoned  on  the  sale  and 


(15) 


The  Right  Way  to  Figure  Profits 


the  amount  is  always  based  more 
or  less  on  a  percentage  of  the 

sales  totals. 

Remuneration  Mercantile  o  r 
of  Salesmen  ,  _  . 

other  taxes  of  a 

similar  nature  are  assessed  on  a 

certain  percentage  of  the  annual 

sales. 

Also  if  any  special  taxes  are 
levied  by  the  state  on  the  sales 

of  any  special 
Mercantile  goods,  such  as  re- 

Taxcs  volvers,  drugs, etc. 

the  amount  is  always  a  certain 
percentage  of  the  selling  price  of 
such  items  and  not  a  percentage 
of  the  cost. 

All  allowances  in  percentage 
to  customers  for  any  reason,  or 

no  reason  at  all, 
are  based  on  the 
selling  price. 
There  is  the  10%  allowance  by 
Department  Stores  to  the  clergy, 
dressmakers,  teachers,  etc. — all 
deduct  the  10%  from  the  selling 
price,  and  they  neither  know  of 
nor  care  about  the  cost. 

Certainly  the  astute  mana¬ 
gers  of  department  stores  do 

(16) 


Allowances 
Always  on  Sale 


The  Right  Way  to  Figure  Pro-fits 


not  add  10%  and  then  allow  10% 
thereby  losing  1%. 

The  use  of  terms  of  percent¬ 
age  in  the  advertisements  of  re¬ 
tailers  has  educated  the  con¬ 
sumer  to  figure  percentage. 

No  merchant  enjoying  a  rep¬ 
utation  for  honesty  would  think 

of  making  such 
In  Advertising  an  aHuring  prom¬ 
ise  as  to  give  a 
dollar's  worth  of 
goods  for  fifty  cents  or  even  the 
whole  dollar's  worth  for  nothing. 

This  probably  seems  ridicu¬ 
lous,  yet  such  expressions  as 
“Let  us  save  you  50%  to  100% 


We  Speak  of 
10%  off 


ON  YOUR  CLOTHING  BILLS,"  are 
used  by  some  business  houses. 

None  can  fail  to  realize  what 
a  saving  of  100%  means.  It 

means  that  they 

Ridiculous  are  g01IJg  to  gl^e 

away  the  goods 

or  merchandise  offered. 

The  consumer  only  has  before 
him  the  selling  price,  and  al¬ 
though  the  merchant  may  be 
making  200%  increase  over 
cost  on  his  goods,  he  can  never, 

(17) 


The  Right  Way  to  Figure  Profits 


never  make  any  money  selling  to 
the  consumer  at  a  saving  of 
100%  even  if  he  got  the  goods 
for  nothing — in  which  case  he 
would  only  come  out  square  and 
at  a  loss  of  his  operating  ex¬ 
pense. 

Again,  through  this  illustra¬ 
tion,  we  see  the  advisability  and 
wisdom  of  figuring,  talking  and 
thinking  of  the  percentage  of 
profit  as  based  on  the  selling 
price — not  on  the  cost. 

The  men  who  figure  profit  on 
the  cost  price  aim  to  prove  the 


correctness  o  f 
that  method  by 
saying : — 


The  Other  Way — 
Figuring  on 
Cost 


“Start  out  with 


a  dollar  in  your  pocket,  and  buy 
two  bushels  of  potatoes  at  50 
cents  a  bushel.  Sell  them  at  75 
cents  a  bushel.  You  now  have 
$1.50.  You  have  gained  50 
cents.  Now  50  cents  is  50%  of 
$1.00,  and  the  profit  is  50%.” 

We  are  dealing  with  the  man 
who  keeps  books ;  who  knows 
what  his  sales  totals  are;  who 
has  an  expense  account;  whose 


(18) 


The  Right  Way  to  Figure  Profits 


This  Method  is  salesmen  look  for 


a  compensation 
equal  to  some 


One  for 
Merchants 


fixed  percentage  of  their  total 
sales. 

If  our  potato-selling  friend  in 
the  illustration  had  incurred  ex¬ 
travagant  overhead  charges — 
auto  delivery,  etc.,  to  sell  his  po¬ 
tatoes  and  his  selling  cost  would 
have  been  40%  on  the  sales — his 
profits  would  have  been  losses. 

Some  have  an  impression 
doubtless  based  on  an  inaccu¬ 


rate  and  incom- 
p  1  e  t  e  informa¬ 
tion,  that  this 
method  of  figur- 


Only  the  True, 
Correct  Method 
Being  Sought 


ing  the  percentage  of  profit  on 
the  selling  price  is  for  the  pur¬ 
pose  of  fooling  one's  self  into  the 
belief  that  one  is  making  less 
money  than  is  really  the  case. 
This  is  not  so.  Business  men 
should  figure  the  percentage 
of  profit  on  the  selling  price  in 
order  to  arrive  at  the  exact  truth 
and  to  avoid  fooling  themselves 
into  believing  that  they  are  mak¬ 
ing  money  when  they  are  losing. 


(19) 


The  Right  Way  to  Figure  Profits 


Result  of 
Figuring 
Percentage  of 
Profit  on  Cost 


Of  course,  net  profit  in  a  suffi¬ 
cient  volume  of  dollars  and  cents 
is  the  ultimate  goal,  but  again 
the  fact  may  be  repeated  that 
correct  methods  are  necessary  to 
the  attainment  of  any  desirable 
thing. 

As  an  illustration  of  the 
greater  safety  of  figuring  on 

sales,  especially 
with  untrained 
minds  which  do 
not  properly  dis¬ 
criminate,  a  case 
may  be  cited  where  the  General 
Manager  of  a  business  sold  an 
article  which  cost  $.80  for  $1.00 
and  basing  his  percentage  of 
profit  on  the  cost  figured  that  he 
was  making  25%.  At  the  end 
of  a  given  period  the  sales  total¬ 
ed  $20,000.  The  manager  told  a 
stockholder  the  amount  of  sales 
and  also  the  percentage  of  profit. 

The  presumption  was  that  a 
profit  of  $5000.00  had  been  real¬ 
ized,  while  the  books  only  showed 
a  profit  of  $4000.00  or  20%  on 
the  gales. 


(20) 


The  Right  Way  to  Figure  Profits 


This  General  Manager  was 
doubtless  like  many  other  men 
in  the  fact  that  it  is  necessary 
for  them  to  explain  many,  many 
details.  Then,  why  add  one  more 
item  to  this  list  of  things  to  be 
explained,  when  useless,  time- 
wasting  expositions  could  be 
spared  Manager  and  stockholder 
by  figuring  on  the  selling  price. 

Cases  have  come  to  our  notice 
where  arrests  for  defaulting 
have  actually  been  made  in  such 
instances,  and  the  wisdom  of 
figuring  the  percentage  of  profit 
on  the  sale  has  been  taught  the 
prosecutor  and  defendant  at 
considerable  expense. 

As  a  specific  instance  of  a  case 
where  the  matter  of  the  method 


of  figuring  the 
percentage  o  f 
profit  was  re- 


Percentage  in  the 
Criminal  Courts 


viewed  in  court,  it  is  on  record 
that  some  years  since,  a  Phila¬ 
delphia  cloth  merchant  had  his 
Manager  (who  was  also  his 
bookkeeper)  arrested  for  em¬ 
bezzlement. 

The  facts  were  that  the  pro- 
(21) 


The  Right  Way  to  Figure  Profits 


prietor  had  a  certain  line  of  im¬ 
ported  goods  on  which  he  had  a 
fixed  percentage  of  profit — say 
25%.  He  figured  his  profit  on 
the  cost — not  on  the  selling  price. 

The  proprietor  went  to  Eu¬ 
rope.  When  he  came  back  he 
looked  over  the  books  and  found 
that  the  sales  during  his  absence 
amounted  to  $125,000;  he 
thought  of  the  25%  profit  he  had 
been  making  and  thought  he 
should  have  $31,250  gross 
profits. 

On  referring  to  other  records 
he  found  that  he  had  but  $25,000 

gross  profits ;  — 
Ignorance  Leads  he  figured  he  was 

short  $6250.00  in 
his  gross  profits. 
He  had  the  manager  arrested  for 
embezzlement.  The  manager 
was  thrown  in  the  county  prison ; 
an  expert  accountant  was  sent 
for,  and  two  days’  work  on  the 
books  failed  to  reveal  any  irreg¬ 
ularities.  The  expert  accountant 
closely  questioned  the  merchant 
as  to  how  he  came  to  charge  the 
manager  with  embezzlement. 

(22) 


to  Arrest  of  an 
Innocent  Man 


The  Right  Way  to  Figure  Profits 


‘Diis  conversation  revealed  tha 
startling  fact  that  it  was  on  the 
matter  of  an  incorrect  concep¬ 
tion  of  net  profits  due  to  a  false 
method  of  figuring  the  percent¬ 
age  of  profit  that  the  charge  of 
embezzlement  was  laid. 

Two  hours*  attempted  expla¬ 
nation,  by  the  expert  accountant, 
of  the  matter  of  the  methods  of 
calculating  the  percentage  of 
profit  and  an  attempt  to  show 
that  any  per  cent,  of  a  smaller 
sum  is  a  smaller  per  cent,  of  a 
larger  sum,  or  that  25%  of  100 
was  20%  of  125,  failed  to  show 
the  merchant  where  he  had  made 
his  disastrous  mistake. 

The  accountant  then  sent  for 
a  box  of  matches.  He  counted 

out  one  hundred 
Hard  to  Drive  a  matches.  He  then 

™n‘  ™r°ugh  a  added  25  matches 
Thick  Skull  . 

for  the  25%  profit 
that  the  merchant  talked  about. 
Then  said  he,  “We  will  suppose 
that  these  125  matches  equal  the 
amount  of  your  sales,  $125,- 
000.00  as  you  saw  when  you 

(23) 


The  Right  Way  to  Figure  Profits 


came  home  from  abroad.  You 
believed  you  were  making  25% 
profit.  You  did  not  think 
whether  this  percentage  was  on 
the  cost  or  on  the  selling  price. 

“You  possibly  thought,  in 
common  with  a  great  many 
other  merchants,  who  have 
given  the  matter  no  considera¬ 
tion,  that  it  made  no  difference — 
but,  Sir,  you  went  to  your  sales 
account,  or  to  these  125  matches, 
you  took  therefrom  25%  of  the 
amount  of  your  sales,  $125,000, 
and,  in  so  doing,  you  went  into 
your  cost  6%  matches,  or  $6250. 

“In  other  words,  you  calcu¬ 
lated  you  had  25% — 31*4 — 
($31,250.00)  on  the  125  matches 
or  $125,000,  whereas  you  had 
made  a  gain  of  this  25%  not  on 
$125,000  but  on  $100,000 — you 
had  only  made  20%  on  the  $125,- 
000  or  $25,000,  so  the  best  thing 
you  can  do  is  to  get  this  mana- 


ager  out  of  jail 
and  make  amends 
to  him  as  best 


A  Costly 
Lesson 


you  can.” 

The  merchant  saw  his  mistake 
(24) 


The  Right  Way  to  Figure  Profits 


and  forthwith  secured  the  re¬ 
lease  of  the  bookkeeper  from 
prison,  but  incidentally  paid 
$2,500  damages  for  false  arrest 
and  imprisonment. 

In  a  recent  series  of  articles, 
uThe  New  Gospel  of  Efficiency,” 
Mr.  E.  St.  Elmo  Lewis,  adver¬ 
tising  manager  of  Burroughs 
Adding  Machine  Co.,  Detroit, 
said: 

“A  retailer  was  buying  shirts  at 
$1.00  a  piece.  I  asked  him  how  much 


it  cost  him  to  do 
business.  He  said 
he  thought  25% 
would  cover  it.  I 
asked  him  what  he 


Prominent 
Expert  Figures 
Only  on  Selling 
Price 


thought  he  would  make  on  it;  he  said 
he  marked  it  up  for  20%  profit  and 
his  price  was  $1.45.  His  price  should 
have  been  $1.81  to  make  a  20%  profit.” 

This  statement  from  a  promi¬ 
nent  official  of  a  company  mak¬ 
ing  wonderful  calculating  ma¬ 
chines,  and  whose  daily  work 
has  to  do  with  the  various 
methods  of  correct  and  rapid 
figuring,  would  surely  not  be 
based  on  any  method  except  the 
right  one. 

Furthermore,  the  method  of 


(25) 


The  Right  Way  to  Figure  Profits 


Figure  on 
Selling  Price 


figuring  the  percentage  of  profit 
on  the  selling  price  is  followed 

and  insisted  upon 
Busmess  Houses  j^y  thousands  of 

manufactur¬ 
ing  and  mercan¬ 
tile  houses  throughout  the  coun¬ 
try,  who  only  advocate  methods 
which  are  absolutely  correct 
and  in  accord  with  sound  busi¬ 
ness  practices. 

From  an  article  printed  some 
time  ago  we  quote  as  follows: 

“You  will  find  in 
every  arithmetic 
such  examples  as : 
A  man  buys  a 
horse  for  $50  and  sells  him  for 
$75,  what  percentage  of  profit 
does  he  make?  Answer,  50%.” 
No  more  fatal  and  misleading 
ones  were  ever  penned.  They 
lead  us  to  think  of  the  percent¬ 
age  of  profit  from  an  unbusiness¬ 
like  stand-point,  and  cause  many 
business  men  to  think  they  are 
making  much  larger  profits  than 
they  really  are.  This  m^kes 
them  prodigal  of  expense  and 
often  leads  to  a  failure,  which 

(26) 


“Arithmetic 
Method*  * 
Misleading 


The  Right  Way  to  Figure  Profits 


with  a  more  thorough  knowl¬ 
edge  of  percentage  could  have 
been  avoided. 

Suppose  a  man  to  have  in  con¬ 
templation  the  sale  of  a  horse 
on  the  basis  of  the  above  trans¬ 
action.  A  broker  approaches 
him  and  offers  to  conduct  the 
negotiation.  He  asks  a  commis¬ 
sion  of  33  1-3%. 

Now,  the  owner  of  the  horse, 
having  a  profit  of  50%  in  sight, 
„  .  „  agrees  to  this, 

Wrong  Method  and  the  br°ker’ 

having  complet¬ 
ed  the  transaction,  renders  a  bill 
as  follows: 

Sold  one  horse  at . $75 

Commission,  33  1-3% . -25 


Due  seller . $50 

The  seller's  books  would  show 
a  profit  of  50%  entirely  eaten 
up  by  a  commission  of  33  1-3%. 
Not  good  figuring,  is  it?  Still 
that  is  the  way  nine-tenths  of 
our  smaller  merchants  figure, 
which  fact  often  accounts  for 
their  being  small. 

Always  figure  your  profit  on 
(27) 


The  Right  Way  to  Figure  Profits 


the  sale.  Then  you  will  be  on 
,  .  the  safe  side.  To 

Safe  Side  obtain  the  cor¬ 

rect  percentage 
of  profit  on  any  transaction  sub¬ 
tract  the  cost  from  the  selling 
price,  add  two  ciphers  to  the 
difference,  and  divide  by  the 
selling  price. 

EXAMPLE  NO.  1 


An  article  costs  $5  and  sells 
for  $6.  What  is  the  percentage 
of  profit?  Answer,  16  2-3%. 

Process — Six  dollars  minus  $5 
leaves  $1,  the  profit.  One  dol¬ 
lar  divided  by  $6, 
Process  of  decimally,  gives 

Figuring  the  correct  an¬ 

swer,  16  2-3%. 

This  operation  is  simple  and 
a  knowledge  of  it  being  vital  to 
any  one  engaged  in,  or  intending 
at  any  time  to  engage  in  busi¬ 
ness,  it  should  be  carefully  com¬ 
mitted  to  memory  and  constant¬ 
ly  borne  in  mind. 


EXAMPLE  NO.  2 


An  article  costs  $3.75.  What 
must  it  sell  for  to  show  a  profit 

(28) 


The  Right  Way  to  Figure  Profits 


Analysis  of 
Figures 


of  25%  ?  An¬ 
swer,  $5. 

Process  —  De¬ 
duct  25  from  100.  This  will  give 
you  a  remainder  of  75,  the  per¬ 
centage  of  the  cost.  If  $3.75  is 
75%,  1%  would  be  $3.75  divided 
by  75  or  5  cents,  and  100% 
would  be  $5.  Now,  if  you  mark¬ 
ed  your  goods  as  too  many  do, 
by  adding  25%  to  the  cost,  you 
would  obtain  a  selling  price  of 
about  $4.69,  or  31  cents  less 
than  by  the  former  method. 
Which  is  right? 

When  you  take  25%  off  the 
selling  price,  figured  according 
to  the  first  rule,  you  will  still 
have  your  cost  intact.  Take 
25%  from  the  second  sum  and 
see  if  the  cost  remains. 

A  large  department  store 
changed  hands.  The  goods  in 

stock,  to  cover ' 
freight  and  other 


Great  Merchant 
Shows  Ignorance 


charges  were 
marked  up  10%.  They  were  to 
be  sold  at  actual  cost,  but  for 


convenience  sake  were  invoiced 
as  marked.  The  inventory  hav¬ 
ing  been  completed,  nothing  re- 

(29) 


The  Right  Way  to  Figure  Profits 


mained  to  be  done  but  take  off 
the  10%  that  had  been  added. 

The  parties  to  the  sale  accord¬ 
ingly  approached  the  accountant 
having  the  matter  in  charge 
with  a  request  that  this  be  done. 
The  man  of  figures  set  about 
making  an  elaborate  calculation 
with  this  object  in  view,  when 
he  was  questioned  by  the  seller 
as  to  what  he  was  doing. 

“Reducing  the  goods  to  cost,” 
he  answered. 

“Nonsense!  Just  take  off 
10%, ”  said  the  seller. 

“Do  you  want  it  done  that 
way?”  asked  the  accountant. 

“Why  not?”  said  the  mer¬ 
chant. 

“Well,  just  add  10%  to  a  dol¬ 
lar  and  from  the  amount  thus 
obtained  deduct  10%  and  see  if 
you  have  your  original  dollar 
left.” 

The  merchant  saw  the  point 
at  once  and  said  no  more  to  the 
man  of  figures,  who  was  saving 
him  more  than  $3,000  which  he 
would  have  lost  on  account  of  a 

lack  of  knowledge  of  percentage. 

(30) 


The  Right  Way  to  Figure  Profits 


Eight  Reasons  why  the  Percent¬ 
age  of  Profit  should  be  Figured 
on  the  Selling  Price  and 
not  on  the  Cost. 


First  —  Because  the 
remuneration  of  sales- 
mt  men  is  figured  on  a  cer¬ 
tain  percentage  of  the 
Selling  Price. 

Second — Because  the 
percentage  of  expense 
of  conducting  business 
is  based  on  the  Selling 
Price.  If  you  talk  per 
cent  of  profit  on  cost  and  per  cent,  of 
expense  on  the  selling  price,  where  are 
you? 

Third — Because  the  mercantile  and 
other  taxes  are  invariably  based  on  a 
percentage  of  the  Gross  Sales. 

Fourth — Because  the  Sales  Totals 
are  always  given  in  books  of  record — 
Cost  Totals  are  seldom,  if  ever,  shown. 

Fifth — Because  a  profit  must  be 
provided  for  two  items  of  capital — < 
one  the  capital  invested  in  merchan¬ 
dise — the  other  the  capital  necessary 

for  operating  expenses  and  other  ex¬ 
penditures  not  properly  chargeable  to 

merchandise  account.  This  is  only 
possible  by  figuring  profit  on  the 
Jelling  Price. 

Sixth — Because  it  indicates  cor¬ 
rectly  the  amount  of  gross  or  net 
profit  when  amount  of  Sales  is  stated 

(31) 


The  Right  Way  to  Figure  Profits 


The  percentage  of  profits  on  sales  is 
indicative  of  character  of  result  of 
years'  business — percentage  of  profit 
on  cost  is  not. 

Seventh — Because  allowances  in 
percentage  to  customers  are  always 
from  the  Selling  Price. 

Eighth — Because  no  profit  is  made 
until  Sale  is  actually  effected. 


The  following  Table  shows  the  per¬ 
centage  which  must  be  added  to  cost 


to  effect  a  given  percentage  of  profit 
the  Selling  Price: 

Add  to 

To  Make  on 

Add  to 

To  Make  on 

Cost 

Selling  Price 

Cost 

Selling  Price 

5% 

424% 

31.58 

24 

754 

7 

33  1-3 

25 

10 

9 

35 

26 

ii.il 

10 

37  54 

2754 

12.36 

11 

40 

28A 

1254 

li  X 

42.86 

30 

13.63 

12 

45 

31 

14.94 

13 

47 

32 

16.28 

14 

50 

33  1-3 

16  2-3 

1454 

53.85 

35 

17.65 

15 

55 

3554 

19.05 

16 

60 

3754 

20.00 

16  2-3 

65 

3954 

20.49 

17 

66  2-3 

40 

21.96 

18 

70 

41 

23.46 

19 

75 

4224 

25 

20 

80 

4454 

26.58 

21 

85 

46  . 

28.21 

22 

90 

4754 

29.88 

23 

100 

50 

(33) 


TABLE  FOR  FIGURING  NET  PROFITS 

If  your  cost  of  doing  business  figured  on  sales  is  represented  by  one  of  these  figures 


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COURTESY  OF  SUTLER  BROS. 


3  0112  0728075 


